Will My Clean Vehicle Qualify for the New Tax Credit?
The misleading information started circulating almost immediately… “Get $7,500 when you buy your Tesla with the new tax credit!” On August 16, 2022, President Biden signed the Inflation Reduction Act into law, and with it came a flurry of oversimplified statements encouraging consumers to buy an electric vehicle (EV) and reap the tax benefits. A wise buyer will pause to ask: how does the new law differ from the previous tax credit, and how can you ensure your vehicle will qualify for that maximum $7500 credit?
Under the previous law, battery size mattered and auto manufacturers were subject to a cap on how many vehicles they could sell before the tax credit would be reduced or eliminated for taxpayers. Under the new law, the manufacturer cap will be lifted, but eligibility for the credit will depend on the vehicle’s assembly and components and on taxpayer income.
The new terms of the Inflation Reduction Act apply to vehicles purchased on or after January 1, 2023. Before making your purchase, you can consult a Certified Tax Planner to understand how the EV tax credit might become a part of your tax strategy. Read on to learn more about the Inflation Reduction Act and what it means for clean vehicle purchases.
MADE IN THE USA: NEW RESTRICTIONS
A key change to the clean vehicle tax credit is the requirement that final assembly of the vehicle must take place in North America. If the manufacturer does not finish building the car in the United States, Canada, or Mexico, the car will not qualify for the new tax credit. This change went into effect when President Biden signed the law on August 16th.
The one workaround is if a taxpayer had a written binding contract in place before this date. For tax purposes, a written contract must have provisions that limit damages to at least 5% of the price. If a taxpayer had signed such a contract but had not yet taken possession of their vehicle on August 16th, they can still claim the credit based on the prior tax rules. This is most likely to apply to taxpayers who put down a deposit for a car that had not yet been built.
The second major change to the clean vehicle credit involves the location where the manufacturer mined the critical minerals for the car battery. Starting in 2023, 40% of the critical minerals must come from North America or one of the 20 countries that has a free-trade agreement with the US. If the manufacturer recycles the mineral in North America, it will also qualify. Half (or $3750) of the available credit depends on meeting this requirement.
The 40% requirement for critical minerals will rise each year until it reaches 80% in 2027:
| Tax year the vehicle is placed in service | Percentage of critical minerals required |
| 2023 | 40% |
| 2024 | 50% |
| 2025 | 60% |
| 2026 | 70% |
| 2027 | 80% |
The other $3,750 of the clean vehicle credit depends on where the battery components were assembled. Manufacturers must assemble 50% of the vehicle battery in North America or in countries that have a free-trade agreement with the US. Again, the requirement will rise each year until it reaches 100%:
| Tax year the vehicle is placed in service | Percentage of battery components |
| 2023 | 50% |
| 2024 | 60% |
| 2025 | 70% |
| 2026 | 80% |
| 2027 | 90% |
| 2028 and later | 100% |
The last of these geographical limitations is that starting in 2025 no battery components can come from a country of particular concern—this includes China, which currently produces most battery components.
To help you determine if your vehicle qualifies for the tax credit, the Department of Energy created a list of vehicles that may meet the final assembly requirement. The National Highway
Traffic Safety Administration also has a vehicle identification number (VIN) decoder you can use to find the manufacturing location for a vehicle.
OTHER PROVISIONS
In addition to these production provisions, the Inflation Reduction Act introduced other changes. First, the EV credits have been extended until December of 2032. The previous cap of 200,000 eligible vehicles per manufacturer has also been lifted. This means that starting on January 1,
2023 electric vehicles made by GM, Tesla, and Toyota will once again be eligible for the credit.
The new legislation also included a price cap on vehicles that are eligible for the credit. Below is the price cap for each type of vehicle based on the manufacturer’s suggested retail price (MSRP):
| Type of electric vehicle | Maximum MSRP |
| Car | $55,000 |
| Sports Utility Vehicle/Truck | $80,000 |
| Van | $80,000 |
Lastly, the new law has income limitations based on a taxpayer’s filing status and adjusted gross income (AGI). Those who earn more than the listed amounts do not qualify for the EV credit:
| Tax Filing Status | Adjusted Gross Income |
| Single | < $150,000 |
| Head of Household | < $225,000 |
| Married Filing Jointly | < $300,000 |
When the new laws kick in next year, taxpayers will be able to claim the clean vehicle credit on their tax returns. Starting in 2024, you can also claim the credit at point of sale, bringing the
price down right when you purchase the vehicle. Details on how dealerships will know who qualifies for the credit have yet to be released.
WHAT ABOUT USED VEHICLES?
The rules above apply to new electric vehicles, but the Inflation Reduction Act also added a tax credit for used automobiles. These rules will go into effect in 2024. The buyer will be able to claim the credit on their tax return or as a point-of-sale credit.
What are some of the differences between the credit for new and used vehicles? First, businesses do not qualify for the used vehicle credit. The maximum tax credit is also lower at either $4,000 or 30% of the vehicle’s value—whichever is less.
The income limitations also change for the used vehicle credit:
| Tax Filing Status | Adjusted Gross Income |
| Single | < $75,000 |
| Head of Household | < $112,500 |
| Married Filing Jointly | < $150,000 |
Used vehicles must also be purchased from a dealer, not a private owner. Lastly, the car must be under $25,000 and must be at least 2 years old. The age of the vehicle is likely to be the biggest obstacle, since the average used EV costs $40,174. A study done in July 2022 showed that only 17.9% of used EV sales in the previous 90 days sold for under $25,000. Potential buyers should also note that taxpayers can only claim this credit once every three years.
SUMMARY
The Inflation Reduction Act incentivizes the purchase of electric vehicles made in North America. Taxpayers looking to benefit from the updated tax credit will need to consider the location where the manufacturer sources critical minerals and assembles the car battery. With some advance research, the payout could be as much as $7,500 saved on a clean energy car.
For further guidance on understanding the new electric vehicle credit and incorporating it into your tax-saving strategy, connect with us to find out how a Certified Tax Coach can help you today.
